Investment Review №352. Playing Defense

Global Perspective

Index and Sector Performance During the Period Under Review.
Source: FactSet, Freedom Broker analysis

U.S. equities saw a clear rotation away from mega-cap growth during the period, with capital broadening into defensive sectors and the wider market. The equal-weighted S&P 500 gained 0.78%, sharply outperforming the cap-weighted index, which fell 1.29%. The technology-heavy Nasdaq-100 dropped 2.02%.

Sector performance tells the same story. Flows shifted toward defensives and energy, with the latter continuing to benefit from a higher geopolitical premium in oil. Energy led with a 4.87% gain, followed by Health Care at +3.72%, Consumer Staples at +2.94% and Real Estate at +2.09%. Technology, by contrast, fell 3.37%, while Communication Services traded sideways, adding just 0.44%.

Share of Index Constituents With Positive Returns During the Period Under Review.
Source: FactSet, Freedom Broker analysis

Health Care was one of the period’s top performers, gaining 3.72%. The main catalyst came from preliminary Phase 3 results for Moderna (MRNA) and Merck (MRK) personalized mRNA cancer vaccine in combination with Keytruda for melanoma patients. The combination met its primary endpoint, delivering a statistically significant improvement in recurrence-free survival versus Keytruda alone, while also reducing the risk of distant metastases. The market reaction was sharp: Moderna surged roughly 177%, while Merck gained more than 12%. Despite accounting for less than 1% of the index, Moderna contributed about 27% of the sector’s gain. The rest of the advance was broader-based, reflecting rotation into defensive industries.

At the same time, the sector’s fundamental outlook changed little over the period. Consensus still points to just 1.15% EPS growth in 2026, followed by a 21.3% increase in 2027, largely off a low 2026 base. Valuation is becoming less forgiving after the sector’s multi-month rally. The forward multiple now stands at 18.2x, versus a three-year average of 16.6x. That could limit further upside. The completed rally in Moderna and Merck may also limit near-term upside. So far, only top-line results have been released. The full data set, including a more detailed breakdown of efficacy, safety and overall survival, is still pending. The trial will continue, leaving the market to look for further confirmation that the treatment benefit holds up.

The Materials sector gained 0.75% over the period, led primarily by gold miners. Newmont (NEM) and Freeport-McMoRan (FCX) made meaningful contributions to XLB, benefiting from higher gold and copper prices. Weakness in steel names partially offset those gains, leaving performance within the sector uneven. Fundamental expectations changed little over the period. Consensus still calls for strong sector EPS growth of 38.07% in 2026 and 8.67% in 2027. Valuation is less supportive, with the sector trading at 19.4x forward earnings, above its three-year average of 17.8x.

Gold miners caught a bid as gold pushed toward its highest level in >3 months. Dollar weakness was a key driver, with the 30-day USD/gold correlation falling to −0.6, restoring the inverse dollar relationship as a meaningful support for bullion. The same macro backdrop lifted alternative assets, with bitcoin gaining 24% over the period. Gold and crypto are not identical trades, but their simultaneous rally points to growing demand for diversification amid a weaker dollar and rising uncertainty over the path of rates.

Rolling Gold–Dollar Correlation.
Source: Bloomberg, Freedom Broker analysis

Central banks are adding another layer of support, with China at the forefront. Estimates suggest China bought >40 tonnes of gold through London’s OTC market in June—the second-largest monthly volume since the start of 2025—while official data showed just 15 tonnes. That gap suggests China’s actual gold demand may be materially higher than reported. Momentum strategies are adding fuel: the persistent uptrend is pulling fresh capital into ETFs, futures and gold miners. But that technical bid cuts both ways—if price momentum fades, positioning could unwind quickly, increasing the risk of a sharper correction.

The macro focus was on the July FOMC minutes, which highlighted a notably divided Fed. Most officials backed keeping the policy rate at 3.50–3.75%, while three FOMC members favored a 25 bps hike, underscoring a meaningful split within the Committee. Policymakers flagged still-elevated inflation and upside risks from tariffs, energy prices and geopolitical uncertainty. While most expect inflation to ease in 2H26, the Fed remains firmly data-dependent on the next rate moves.

July retail sales added another warning signal on the growth outlook. Headline sales fell 0.6% MoM vs. +0.1% expected, while core sales ex autos and gasoline declined 0.24% MoM vs. +0.3% consensus, and the control group fell 0.44% MoM. Online sales drove much of the downside surprise, dropping 2.25% MoM, potentially reflecting the unwind of the June Amazon Prime Day boost and more cautious consumer behavior after several months of strong spending. The market expects a rebound in August, with headline sales and the control group forecast to rise 0.8% MoM. Still, the consumer remains a key swing factor for the growth outlook.

Market Focus

Over the next few weeks, investors will focus on geopolitics and the winding-down corporate earnings season.

In the second half of August, WTI traded in a relatively tight range, with reports of a potential U.S.-Iran ceasefire pushing prices back toward ~$80/bbl. The oil market remains undersupplied as the blockade of Iranian ports and reduced traffic through the Strait of Hormuz constrain flows, while Houthi attacks on Saudi tankers add another layer of disruption. Russian refined-product exports have also fallen amid attacks on refineries, adding further pressure to global energy supply.

The White House’s shifting strategy—from military action to negotiations, and ultimately to “economic strangulation” of Iran—has prolonged the conflict. Global crude and refined product inventories continue to draw down. Since the outbreak of hostilities, the U.S. Strategic Petroleum Reserve has declined by 121.6 million barrels (‑29.3%). If current conditions persist, prices could rebound above $90 per barrel, while a further escalation could lift U.S. WTI to more than $100 per barrel. Conversely, a normalization of shipping through the Strait of Hormuz could trigger a sharp pullback, taking WTI prices to around $70 per barrel.

The earnings season is nearly complete: 467 index constituents have reported to date. Analysts flag several remaining results that could attract heightened investor interest. 

Palo Alto Networks (PANW) is scheduled to report for Q4 FY26 on September 2. The company enters the print off a strong third quarter, with revenue up 31% YoY to $3.0bn and adjusted net income increasing 22% to $684m. Adjusted EPS came in at $0.85 versus $0.80 a year ago. Demand for AI infrastructure security continues to be the primary growth driver: annual recurring revenue in the advanced products segment grew 60% to $8.1bn. For Q4, management guides to revenue of $3.35bn (up 32% YoY) and adjusted EPS of $0.96–$0.98. Investors will monitor the pace of organic order growth, the CyberArk and Chronosphere integration, and trends in margins and FCF. The consensus price target for the stock is $365. 

Broadcom (AVGO) will release its Q3 FY26 results on September 3. The company enters the print after a very strong second quarter, with revenue up 48% YoY to $22.2bn and adjusted EPS up 54% to $2.44. The key driver remains surging demand for AI solutions: AI revenue reached $10.8bn, up 143% YoY, led by shipments of custom accelerators and data-center networking equipment. For Q3, management guides to revenue of roughly $29.4bn, implying 84% year-over-year growth, with AI-solutions revenue potentially exceeding $16.0bn (up more than 200%). Investors will focus on AI growth momentum, shipment trends to major cloud customers, and whether elevated operating margins are sustainable. The consensus price target for Broadcom shares is $534.  

Broad Market Technical Analysis

The S&P 500 has pulled back from a recent high near 7,820 to its 20-day moving average, currently around 7,670. The index stays above former resistance at 7,620 and its 50-day moving average near 7,550. The RSI has slipped to 54, signaling softer near-term momentum but not yet a bearish setup. Market breadth has also weakened slightly, with the share of constituents trading above their 50-day moving averages shrinking to 58% from 65%. The near-term outlook remains moderately constructive as long as the index holds the 7,620–7,670 support zone. A sustained break below this area would raise the risk of a move toward the 50-day moving average near 7,550. On the upside, the main resistance is still defined by the recent peak around 7,820. 

Expected Trading Range 

We expect the S&P 500 to trade in a 7,550–7,820 range.